Eye of the Storm: The Impact of Climate Shocks on Inflation and Growth

Abstract This paper examines the impact of climate-induced natural disasters on inflation and economic growth using a large panel of countries from 1970 to 2020. Employing the local projection method, we analyze how various disasters affect these economic indicators, acknowledging that climate shocks can simultaneously stimulate and suppress demand and supply, leading to complex outcomes. Our findings indicate significant yet varied responses in inflation and GDP growth across different types of disasters and regions. Notably, the economic impact differs starkly between advanced economies and developing countries, influenced by each group’s fiscal capacity and institutional strength to manage recovery. This contrast underscores the role of economic structure and fiscal health in shaping the resilience of nations to climate shocks, highlighting substantial disparities in the effects across income levels and economic conditions.